Institutional incentives and earnings quality: The influence of government ownership in China |
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Institution: | 1. Department of Accounting, Waikato Management School, University of Waikato, Private Bag, 3105, New Zealand;2. School of Accountancy, Massey Business School, Massey University, New Zealand;3. School of Accounting, Jiangxi University of Finance and Economics, Jiangxi 330013, China |
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Abstract: | We examine the effect of government ownership and its associated institutional incentives on firms’ earnings quality using a sample of Chinese firms during the transitional economy between 1998 and 2005 when state-owned and non-state-owned firms were traded in the stock exchanges. We find that, in China, state-owned firms exhibit a lower earnings quality property than non-state-owned firms. Particularly, state-owned firms have more earnings smoothing, more frequently managed earnings toward target, less frequent timely recognition of losses, and less value relevance, relative to non-state-owned firms. We also find that state-owned firms have significantly higher discretionary current accruals than non-state-owned firms. We conclude that the Chinese government, through its controlling ownership of state-owned firms, creates incentives and regulatory backing for self-serving purposes that negatively influence these listed firms’ financial reporting. |
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Keywords: | Earnings quality Government ownership China State-owned firms |
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